What Happens to Your Deposit If You Walk From a P&S

The deposit on a Massachusetts purchase and sale agreement is money you can lose. Kelly v. Marx, a 1999 Supreme Judicial Court decision, settled when, and the SJC has followed it since.

What happened

On March 18, 1994 the buyers signed an offer to purchase a house in Worcester for $355,000. The sellers accepted, and the buyers gave them $1,000 as a partial deposit. By early May the parties had signed a purchase and sale agreement, and the buyers paid $16,750 more, bringing the deposit to $17,750, five percent of the price. Clause eighteen of the agreement said that if the buyer failed to fulfill the buyer’s agreements, all deposits would be retained by the seller as liquidated damages. The closing was set for September 1, 1994. On August 9 the buyers notified the sellers in writing to put the house back on the market, because they hadn’t been able to sell their current home. The sellers accepted another offer that month and closed with the new buyers for $360,000 on September 20.

What the court decided

The Superior Court let the sellers keep the deposit. The Appeals Court reversed, reasoning that the sellers had suffered no actual loss, so the deposit would work as a penalty. The SJC took the case and sided with the sellers. It rejected the second look approach and held that a liquidated damages clause in a purchase and sale agreement will be enforced where, at the time the agreement was made, potential damages were difficult to determine and the clause was a reasonable forecast of the damages expected from a breach. A judge examines only the circumstances at contract formation. A sum grossly disproportionate to a reasonable estimate of actual damages, made at that time, won’t be enforced, and the court pointed to a 1966 decision in which a penalty of one third of the contract price failed. On these facts, five percent of the purchase price was a reasonable forecast of what the sellers stood to lose from a breach, costs the court tied to finding another buyer and waiting to sell, and the resale price, a fact from after the breach, did not enter the analysis.

Why the buyers’ argument lost

The buyers said the sellers would get a windfall, since they lost nothing on the resale. The court’s answer was that the parties had agreed on the sum in advance and would be held to their word, quoting a 1900 opinion by Chief Justice Holmes to that effect. The court added that a second look would undermine the certainty the parties sought when they agreed to the clause. In 2008 the SJC applied the same rule in NPS, LLC v. Minihane, a dispute over a stadium seat license, and added that once a liquidated damages clause is enforceable, whether the other side could have mitigated its loss is irrelevant. In 2023, in Cummings Properties, LLC v. Hines, the SJC said again that it follows the single look approach.

Before you sign a P&S

The case is from Worcester, and the rule applies across Massachusetts. In this case the offer carried a small deposit and the purchase and sale agreement a larger one, and the clause reached all of it. Your protection is the set of contingencies written into the agreement, such as financing or inspection, and the dates attached to them. Know which ones return the deposit if they fail, and get any extension in writing before a date passes. If you’re preparing your first offer this fall, send me the P&S before you sign and we’ll read the deposit clause together. Diana Kim, REALTOR®, eXp Realty.